Haley v. Talcott
864 A.2d 86 (Del.Ch. 2004)

  • Haley and Talcott each owned 50% of a restaurant. They were organized as an LLC. They got into an argument and Haley wanted out.
    • The terms of the LLC allowed Talcott to buy out Haley. However, Haley personally co-signed for the mortgage on the property, which meant that even if he was no longer a co-owner, he’d still be on the hook to pay back the mortgage if the LLC went bankrupt.
  • Haley sued for dissolution of the LLC.
    • Dissolution means that a court would order the company to sell off all its assets, distribute the cash to the shareholders, and then stop doing business.
    • Under Delaware law (Delaware LLC Act §18-802), a court is allowed to dissolve an LLC “whenever it is not reasonably practicable to carry on the business in conformity with the limited liability company agreement.”
  • The Trial Court found for Haley and ordered dissolution.
    • Talcott argued that the terms of the LLC already allowed a mechanism for Haley to leave, and that should be his sole option for leaving. However, the Trial Court found that LLC agreement was improper because it left Haley holding the bag for the mortgage. Since the LLC agreement didn’t have a clause for how to effectively deal with that problem, it was no longer “reasonably practical” for the LLC to carry on in conformity with the LLC agreement.
      • In general, an LLC is more like a partnership than a corporation, and so the members can negotiate any deal they want to negotiate, including limiting the ways a member could leave the LLC.
  • Talcott was not out of options if he wanted to keep the restaurant running. All he had to do was buy the restaurant when it was offered for sale by the LLC. Then he’d own 100% of what the LLC used to own, and he’d be on the hook for the mortgage, and Haley would be free and clear.